Don't let your guard down
Head of FX Strategy, Saxo Bank Group
There is the idea afloat, as outlined in an FT piece (paywall) yesterday, that the Trump administration may be looking to climb down from the trade spats with traditional allies and focus more exclusively on China, possibly even in coordination with other major economic powers, who also have some of the same gripes about China’s policies.
The USDCNY rate continues to tick higher recently, with 6.88 touched overnight. Let’s recall that, while 7.00 is the ultimate focus for whether a renminbi devaluation is afoot, the USDCNY rate only saw one daily close above 6.90.
Other CNY levels are the 8.00 level in EURCNY, which has been another floor for the CNY since the level was first approached last year.
Elsewhere, the chief focus across markets should be on US yields and the risk that markets are complacent on the longer end of the US yield curve and whether the 3.00% resistance in the 10-year US yield will remain in place. As well, short US rates have picked up strongly as more rate hikes this year get more fully priced into the forward curve (for perspective, we are at about 50/50 on whether a third rate hike, to 2.5-2.75% will happen through the FOMC meeting next March, while additional rate hike expectations fade quickly beyond that third hike).
A move above that level would likely inject fresh volatility across global markets, pressuring EM and possibly risk assets generally.
Canada expressing willingness to change its stance on US dairy imports helping boost CAD as the market senses that some sort of amenable trade deal is on its way soon. But more important was the fresh spike in oil prices and the risk to the eastern seabord’s gasoline supplies if the approaching Hurricane Florence disrupts the pipeline as the storm stalls and floods large areas.
USD – the greenback is a mixed bag, even as yields pull sharply higher and should be offering some support if yield spreads continue to widen. US Fed Board of Governors member Brainard out speaking later today and Fed’s Beige Book also set for release later.
EUR – the euro bounce yesterday appeared Brexit-news flow inspired, and doubt there is further near- term potential from that source. Focus should supposedly be on this Thursday’s ECB, but the market is expecting little in the way of guidance as the next nine months of policy (taper to zero followed by no hikes until next summer). Elsewhere, Italy’s Salvini is making reassuring noises for now as the budget process plays out over the next few months, but over the longer term questions remain.
JPY – conflicting signals for the yen as risk appetite in non-US equity markets has been weak lately, while sovereign bond yields are on the rise, generally seen as pressuring the JPY. A sustained move above 112-113 in USDJPY would likely require a sustained move above 3.00% in the US 10-year yield.
GBP – the Brexit endgame is coming into view, with endless speculation on how it will play out . It seems clear that the UK domestic political dynamics are the most important factor, as the EU is making the right signs that it will agree to a deal, but the timing of the deal’s announcement and its passage by the UK parliament are the chief questions for GBP traders.
CHF – the compressing Italian yields spreads and higher US bond yields have traders looking away from the franc. The technicals are constructive for a try at the 1.1450+ area in EURCHF again, barring ad hoc Brexit or Italy developments, while USDCHF eyes the 0.9750+ area resistance.
AUD – Aussie traders nervously eyeing that USDCNY level as the 6.90 area approaches and the Australian equity market suffered an ugly downdraft last week. The two-year Australia-US yield spread is a stunning -76 basis points – getting close to the secular low of that spread from over 20 years ago around -100 basis points. Australian employment data up tonight in Asia’s Thursday session.
CAD – CAD getting a double-boost from oil prices spiking higher and Canada accepting US demands for more openness to US dairy imports in ongoing trade negotiations. If the USD remains firm elsewhere, still prefer support to come in ahead of or very near 1.3000 in USDCAD.
NZD - the AUDNZD cross has gone dead in the 1.0900 area, lacking further catalysts ahead of the pivotal 1.0850-1.0800 area. The NZDUSD pair is sticky around 0.6500 at the moment, wondering whether it should have a go at the 2014 lows below 0.6300.
SEK – the Sweden Democrats are the kingmakers even though they will not sit in the government and are more likely to support the centre-right bloc – not seeing the immediate implications for SEK from new policy anticipation as further SEK strength is about Riksbank moving on rates before the ECB, if incoming Swedish data is supportive.
NOK – the krone finally starting to react to rising oil prices, as the Brent oil benchmark approaches 80 dollars/barrel. Supportive yield rises at short end of the Norwegian yield curve are also supportive as we look toward next week’s likely rate hike from the Norges Bank. The next technical level is the 9.62-60 area.
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